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The New Art of Plant Acquisition

Forget the mega merger as a means to acquire new power plants. FERC’s new rules may offer a better path.

Fortnightly Magazine - June 2006

the transaction is de minimis and thereby has no adverse effect on the relevant markets. A simplified analysis could be performed to show that the transaction would cause market concentration to increase by an amount less than the FERC threshold level.

Moreover, when the acquisition has no effect on market concentration because the buyer already exercises control over transaction capacity via a long-term contract, a full DPT analysis is not needed. When Dominion Virginia Power acquired a 181-MW qualifying facility (QF) of Panda Rosemary LP, it did not submit a competitive analysis. 22 Dominion explained that the facility already had been subject to a long-term purchase agreement with Dominion since 1989. The contract will expire in 2015. FERC approved the transaction. 23

But if the size of the acquisition is not deemed to be de minimis, then a full DPT analysis is required. Once this is determined, there are a few more questions to answer.

A Look at Capacity: Buyer vs. Seller

FERC uses market shares and market concentration, aka Herfindahl Hirschman Indices (HHIs), in screening for horizontal market power concerns. An HHI or a composite of market shares 24 in a market is an essential factor in determining the level of market concentration.

HHI tends to be higher in a market that is dominated by fewer suppliers. Regulators and antitrust agencies have challenged mergers with significant market shares and concentration. Nevertheless, market shares and HHI by themselves are neither a necessary nor sufficient basis for challenging a transaction. Other factors, such as a distribution of merging parties’ generating units on a market-supply curve and a control of fuel supplies, are critical for regulators to gauge a potential harm of mergers on competition.

FERC requires a definition of “relevant products” and “geographic markets” that would be affected by the transaction prior to the market-share calculation. In the past, the DPT examined short-term products, which could vary within days because of the inability to store electricity. Thus, long-term contract data are taken into account, as they determine each supplier’s ability to control resources. 25

Additionally, FERC examines two measures of capacity: economic capacity (EC) and available economic capacity (AEC). In the EC measure, each supplier’s resources include capacity owned and controlled through long-term contracts, while the AEC measure subtracts native-load obligations from the EC measure. But is a buyer a net buyer or a net seller?

Many investor-owned utilities (IOUs) own resources that are greater than their peak load because of reserves requirements. Therefore, it is very likely that an IOU will be a net seller in low-load periods and a net buyer in high-load periods. One also would observe more screen failures under the EC scenario than under the AEC scenario. Would more screen failures in the EC, and in low-load periods for the AEC case, be problematic?

FERC has ruled that AEC is more relevant for determining the competitive impact in cases where an applicant has significant native-load obligation. For example, Brattle’s DPT analysis for Nevada Power Co.’s acquisition of GenWest LLC’s Silverhawk power plant found screen failures under the EC